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Singapore Stock Alpha Picks (July 2019) - UOB Kay Hian 2019-07-05: Meaningful Changes To Our Portfolio

Singapore Stock Alpha Picks - UOB Kay Hian Research | SGinvestors.io KOUFU GROUP LIMITED (SGX:VL6) VENTURE CORPORATION LIMITED (SGX:V03) DBS GROUP HOLDINGS LTD (SGX:D05) CDL HOSPITALITY TRUSTS (SGX:J85) SATS LTD. (SGX:S58) FU YU CORPORATION LTD (SGX:F13) DBS GROUP HOLDINGS LTD (SGX:D05) WILMAR INTERNATIONAL LIMITED (SGX:F34) SINGAPORE TECH ENGINEERING LTD (SGX:S63)

Singapore Stock Alpha Picks (July 2019) - Meaningful Changes To Our Portfolio




WHAT’S NEW


Outperforming the market in June.



ACTION


Add CDL Hospitality Trusts as a long idea, and Venture Corp and SATS as short ideas.

  • In the near term, we like CDL Hospitality Trusts for its exposure to Singapore tourist arrivals. However, we are cautious on SATS and Venture Corporation as we believe that there is downside risk to their share prices as we expect both companies to report weaker results for the June quarter.

We remove CCT, OCBC and SPH.



ANALYSTS’ TOP ALPHA* PICKS


Analyst Company Recommendation Performance# Catalyst
Jonathan Koh/ Loke Peihao CDL Hospitality Trusts BUY - Recovery in contribution from Orchard Hotel; growing Singapore tourist arrivals
K Ajith SATS SELL - Weak 1QFY20 results
John Cheong/ Joohijit Kaur Venture Corporation SELL - Weak 2Q19 results
Leow Huey Chuen Wilmar International BUY 13.0 Expect draft prospectus for China IPO to be posted in Jul/Aug 19
K Ajith ST Engineering BUY 11.0 New orders for marine division
Jonathan Koh DBS BUY -5.6 US-China trade deal and strong deposit franchise which ensures firmer NIM.
Joohijit Kaur/ John Cheong Koufu BUY -6.2 Sale of two central kitchens and better-than-expected contribution from R&B Tea.
John Cheong Fu Yu BUY 8.2 Higher-than-expected dividend or potential takeover offer.
* Denotes a timeframe of 1-3 months and not UOBKH’s usual 12-month investment horizon for stock recommendation
# Share price change since stock was selected as alpha pick


CDL Hospitality Trust – BUY (Jonathan Koh & Loke Peihao)


Price Catalyst

  • Event: Recovery in contribution from Orchard Hotel, growing tourist arrivals and limited supply of hotels rooms in Singapore.
  • Timeline: 3-12 months.


SATS - HOLD (K Ajith)

  • Tactical short on SATS, 1QFY19 results likely to be weak. Weak air cargo traffic is likely to impact SATS’ subsidiaries and associates. We forecast 1QFY19 earnings to decline y-o-y. Strikes at EVA Air are also likely to impact earnings from 25%-owned Evergreen Sky Catering (EVA Air’s catering subsidiary). Potential downside to S$4.90.
  • Street overly optimistic of earnings accretion from M&A. SATS has yet to announce specific acquisitions but had guided that it will invest S$1b over three years in China and India, with a focus on central kitchens. We believe that EV/EBITDA-based acquisition multiples are likely to be higher than the current lofty 15x for SATS (including associates). Given that net margins for Greater China associates were just 4.1% in FY19, we believe that odds of planned M&A, boosting group ROE, is low.
  • See SATS LTD. (SGX:S58), SATS Share Price, SATS Target Price, SATS Analyst Reports, SATS Corporate Actions, SATS Announcements, SATS Latest News.

Share Price Catalyst

  • Event: Weak 1QFY20 results
  • Timeline: 1-3 months.


Venture Corp – HOLD (John Cheong & Joohijit Kaur)

  • Limited upside from current level from fundamental and technical perspectives. We see limited upside as Venture Corp is trading near its long-term PE mean, which indicates limited upside from multiple re-rating. In addition, share price has tested resistance level of S$17.00 twice but failed to break through. It is currently supported by the 50-day moving average of S$16.50, and share price could test support at S$15.80 or even S$15.15.
  • Expect near-term volatility. We expect some near-term volatility in stock price as we expect 2Q19 performance to be weaker y-o-y before seeing improvement in 2H19 on new product launches. However, given the uncertain macro outlook, we think there is a higher risk that the new launches might be delayed.
  • Most key customers except PMI reported slower revenue growth in 1Q19. Revenue growth of most of Venture Corp’s key customers, such as Broadcom (+10.0% y-o-y), Thermo Fisher (+4.6% y-o-y) and Illumina (-5.9% y-o-y), were showing slower growth compared to 2018 when most reported double-digit revenue growth. On the other hand, Philip Morris (+3.2% y-o-y ex-currency) continued to report healthy revenue growth and expects full-year ex-currency growth of more than 5%.
  • See VENTURE CORPORATION LIMITED (SGX:V03), Venture Corp Share Price, Venture Corp Target Price, Venture Corp Analyst Reports, Venture Corp Corporate Actions, Venture Corp Announcements, Venture Corp Latest News.

Share Price Catalyst

  • Event:
    1. weak 2Q19 results,
    2. escalation of US-China trade war, and
    3. lower earnings guidance from key customers
  • Timeline: 1-3 months.


Wilmar International – BUY (Leow Huey Chuen)

  • Share price recovered by 15% from recent low. We reckon this recovery came as investors are more confident of the listing of its China operation after Wilmar completed the guidance process required by China Securities Regulatory Commission (CSRC). The listing will be under the name of Yihai Kerry Arawana Holdings (Yihai Kerry). Next step is to submit the listing application and filing of draft prospectus, which is likely to be in Jul 19. Based on the financial summary disclosed, Yihai Kerry reported net profit of Rmb5.28b, Rmb5.52b and Rmb0.83b for 2017, 2018 and 1Q19, or 72%, 59% and 46% of Wilmar group’s net profit respectively. The company is likely to be the largest listed vegetable oil and food ingredient producer in terms of market capitalisation (US$12b-13b at IPO).
  • Another set of resilient results. Wilmar’s 1Q19 results beat street expectations, registering a profit from its oilseeds & grains division vs expected losses. 2Q19 results are expected to be better q-o-q with improvement from oilseeds & grains, while its other two key segments should be able to sustain, if not better, their 1Q19 performances. On a y-o-y basis, results may see a slight decline on a high base when the company reported exceptionally strong soybean crushing margins after Chinese soymeal prices surged due to the start of US-China trade tensions.
  • See WILMAR INTERNATIONAL LIMITED (SGX:F34), Wilmar International Share Price, Wilmar International Target Price, Wilmar International Analyst Reports, Wilmar International Dividends, Wilmar International Announcements. Wilmar International Latest News

Share Price Catalyst

  • Event: Expect the draft prospectus for China IPO to be posted in Jul/Aug 19, and better 2Q19 results to be announced in mid-Aug 19.
  • Timeline: 2-4 months.


DBS – BUY (Jonathan Koh)

  • Maintain guidance for NIM expansion. Management expects net interest margin (NIM) to expand 5bp to 1.95% in 2019 (2018: 1.85%), even if there are no interest rate hikes. DBS raised its fixed home rate by 15bp in Jan 19 and by 40bp in Apr 19, which provide upside for NIM in 1H19. Historically, about 60% of Singapore dollar-denominated loans are re-priced in the first year after an interest rate increase, while the balance 40% is re-priced in the second and third year. Thus, DBS would benefit from NIM expansion in 2H19 and 2020 due to:
    1. the lagged positive impact from rise of SIBOR and SOR in 2018; and
    2. loans on fixed interest rates get re-priced post re-financing.
  • DBS has competitive advantage due to its strong deposit franchise. It had a high Singapore dollar-CASA ratio of 90.4% (savings accounts: 73.3%, current accounts: 17.1%) as of Mar 19. DBS would be the least affected by competition for fixed deposits.
  • See DBS GROUP HOLDINGS LTD (SGX:D05), DBS Share Price, DBS Target Price, DBS Analyst Reports, DBS Dividends, DBS Announcements, DBS Latest News.

Share Price Catalyst

  • Event: NIM expansion in 2H19 and 2020
  • Timeline: 2-4 months.


ST Engineering (K Ajith)

  • Orderbook recognition for next three quarters to rise by 31%. As at end-Mar 19, orderbook grew 6.8% y-o-y to S$14.1b, with the aerospace and electronics sectors contributing S$2.1b for the quarter. ST Engineering had guided that S$4.2b (+31% y-o-y) in orderbook is expected to be delivered in 2019. ST Engineering’s recent award wins, particularly the S$1b Polar Security Cutter (PSC) contract and the S$1.3b aerospace contract, would provide earnings buffer, while recent M&A initiatives are expected to be earnings-accretive.
  • Latest acquisition of satellite communications Satcom company, Newtec, should springboard its Satcom capability in the broadcast & consumer space where the latter's technology has been critical in providing real-time content. Industry sources have estimated that Satcom demand is expected to grow by 10-15% CAGR over the next 10 years. The acquisition is expected to be immediately accretive as Newtec generated S$26m in EBITDA in 2018. We expect ST Engineering's ROE to rise by 5.5ppt to 27.7% by end -21.
  • See ST ENGINEERING LTD (SGX:S63), ST Engineering Share Price, ST Engineering Target Price, ST Engineering Analyst Reports, ST Engineering Dividends, ST Engineering Announcements, ST Engineering Latest News.

Share Price Catalyst

  • Event: New contract wins for the marine division.
  • Timeline: 3-6 months.


Koufu Group – BUY (Joohijit Kaur & John Cheong)

  • Defensive cash cow backed by strong brands and leading market position. Koufu runs highly defensive food court and coffee shop businesses, and is focused on providing competitively-priced meals transacted in cash terms. Its outlet and mall management business has seen consistently high occupancy of at least 93% in the last three years. Koufu intends to distribute at least 50% of its profits for 2019, which is sustainable given strong cash flow generation. This could translate into a potential dividend yeld of 3.9% for 2019.
  • We forecast double-digit net profit growth starting in 2019 with completed enhancement initiatives of Rasapura Masters, a pipeline of five new food courts, and a faster rollout of R&B and Super Tea which are popular among the younger crowds. Beyond Singapore, Macau will be its overseas expansion springboard which is already contributing 9% of group revenue.
  • Disposal of central kitchens should unlock S$10m in value. Koufu owns two central kitchens at 18 and 20 Woodlands Terrace, Singapore. We estimate the eventual sale of these properties could bring in S$10m and unlock gains of up to S$8m, which could translate to higher dividends.
  • See KOUFU GROUP LIMITED (SGX:VL6), Koufu Share Price, Koufu Target Price, Koufu Analyst Reports, Koufu Dividends, Koufu Announcements, Koufu Latest News.

Share Price Catalyst

  • Events:
    1. sale of its two central kitchens;
    2. better-than-expected contribution from R&B Tea; and
    3. better-than-expected performance from Rasapura.
  • Timeline: 3-6 months.


Fu Yu Corp – BUY (John Cheong)

  • High and sustainable dividend yield, inexpensive EV/EBITDA. Fu Yu offers a high and sustainable dividend yield of 8.5% for 2019, and we expect this to increase to 9.0% in 2020, on the back of improving net profit, FCF, and strong net-cash position of S$80m/S$0.11 per share. In 2018, Fu Yu raised its interim dividend for the first time in three years, and we expect further increases.
  • Takeover target for valuation, diversification, capacity and salary savings. Fu Yu could be a takeover target, given:
    1. its attractive valuation at 3.0x 2019F EV/EBITDA (note that its peers were privatised a EV/EBITDA of 5.0-25.7x in the past;
    2. Fu Yu’s geographically diversified plants and customers are highly sought after;
    3. its low utilisation rate of only around 50% could appeal to potential acquirers who are in a hurry to increase production capacity; and,
    4. low-hanging fruit from the savings of three cofounders’ remuneration, estimated at S$2.3m-3.0m p.a. or 20-27% of 2018 net profit.
  • Disclosure of properties’ market value in 2018 annual report indicates massive hidden value. Fu Yu’s conservative accounting policy in recognising its properties at book value has undervalued the assets by S$50m, or 33% of its market cap (S$0.07 per share), based on its 2018 annual report. Any disposal to unlock value could further re-rate the stock in our view. The hidden value of these properties, the company’s inexpensive valuation, diversified operations and low utilisation rate make FuYu an attractive takeover target.
  • See FU YU CORPORATION LTD (SGX:F13), Fu Yu Share Price, Fu Yu Target Price, Fu Yu Analyst Reports, Fu Yu Dividends, Fu Yu Announcements, Fu Yu Latest News.

Share Price Catalyst

  • Events:
    1. Higher-than-expected dividends;
    2. potential takeover offer; and,
    3. potential corporate actions to unlock value, such as disposal of properties.
  • Timeline: 3-6 months.





Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-05
SGX Stock Analyst Report BUY MAINTAIN BUY 0.950 SAME 0.950
HOLD MAINTAIN HOLD 17.910 SAME 17.910
BUY MAINTAIN BUY 30.500 SAME 30.500
BUY MAINTAIN BUY 2.06 SAME 2.06
HOLD MAINTAIN HOLD 5.050 SAME 5.050
BUY MAINTAIN BUY 0.285 SAME 0.285
BUY MAINTAIN BUY 30.500 SAME 30.500
BUY MAINTAIN BUY 3.900 SAME 3.900
BUY MAINTAIN BUY 4.700 SAME 4.700


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